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Khoonming Ho

Lewis Lu

On June 7 2017, the OECD hosted a signing ceremony in Paris
at which representatives of 68 jurisdictions, including Wang
Jun, commissioner of the Chinese State Administration of
Taxation (SAT), signed the G20/OECD BEPS Project's Multilateral
Instrument (MLI). This is set to update 1,100 double tax
agreements (DTAs) and as a further eight countries have
formally expressed their intent to sign the MLI, and an
additional 25 plus countries are anticipated to join the MLI by
the end of 2017, further swathes of the 3,000 plus DTAs in
existence are set for update.

The first round of updates will amend 48 of China's DTAs and
this may rise to 54 in the near future with the additional MLI
adherents. This includes the DTAs with most of China's major
trading and investment partners, but not the US, which has not
signed the MLI. The most significant updates will be the
insertion of the treaty anti-abuse principal purpose test (PPT)
rules into each of the updated DTAs, alongside a new preamble
reinforcing anti-treaty abuse rules. There will also be a
general replacement of the corporate tax residence tie breaker
test in the updated Chinese DTAs, and a modernisation of the
mutual agreement procedure (MAP) and transfer pricing (TP)
articles in older treaties. However, the more potentially
impactful MLI updates, in respect of the new BEPS permanent
establishment (PE) rules, have not been opted to be made to
Chinese DTAs. A host of other rules adopted by other MLI
signatories, in relation to arbitration, transparent entities,
and PE triangular abuses, will also not be adopted by
China.

The significance of the MLI updates for Chinese DTAs, which
are likely to start to take effect from 2019 and 2020 (and
later in some cases), remains to be seen. The precise form of
the updates to each individual Chinese DTA, which is governed
by complex MLI rules and which may in some cases require
competent authority discussions to resolve, require further
detailed study by tax officials and experts. The impact in
practice of the PPT on access to treaty benefits will remain
unclear until further SAT guidance, understood to be currently
under preparation, is finalised and released.

The MLI updates to China's DTA network add to a steadily
evolving framework in which China has been updating existing
DTAs with terms that are by and large increasingly attractive.
This is particularly true of DTAs with countries along the 'One
Belt-One Road' (OBOR) corridors of investment and trade, which
have been identified by the Chinese government as a key focus
of the national external economic strategy. China will look to
complete its DTA network with the 68 OBOR countries, currently
covering 58 of them (26 of the OBOR DTAs will be updated
through the MLI). The recent OBOR DTAs with Russia and Romania
include unprecedented low withholding tax rates on interest and
royalties, and updates to the interest article of the Malaysia
DTA (also OBOR) similarly seeks to facilitate Chinese financing
of local projects. DTAs with OBOR countries facilitate use of
the MAP to support Chinese investors in these countries in
their tax disputes, alongside parallel plans for China to
establish tax cooperation mechanisms with OBOR countries and
assist them in tax authority capacity building.